Concurrently, Moody\u2019s has also changed the outlook to stable from negative
\n SINGAPORE
\nMoody\u2019s Investors Service Tuesday slashed Pakistan\u2019s sovereign credit rating to \u2018Caa3\u2019 amid critical loan talks with the International Monetary Fund (IMF), arguing that the worsening liquidity situation was \u201csignificantly raising default risks.\u201d
\nThe cash-strapped nation has been in talks with the IMF to secure a $1 billion loan, which has been pending since late last year over policy issues. It is part of a stalled $6.5 billion bailout package, originally approved in 2019.
\nMoody\u2019s has also reduced the rating for the senior unsecured MTN programme to (P)Caa3 from (P)Caa1. Concurrently, it has also changed the outlook to stable from negative.
\n\u201cIn particular, the country\u2019s foreign exchange reserves have fallen to extremely low levels, far lower than necessary to cover its import needs and external debt obligations over the immediate and medium term,\u201d said Moody\u2019s in a statement.
\nWeak governance
\nThe rating agency said that although the government was implementing some tax measures to meet the conditions of the International Monetary Fund (IMF) programme and the disbursement of a loan tranche might help to cover the country\u2019s immediate needs, weak governance and heightened social risks impede Pakistan\u2019s ability to continually implement the range of policies that would secure large amounts of financing and decisively mitigate risks to the balance of payments.
\nMoody\u2019s said that the stable outlook reflected its assessment that the pressures that Pakistan was facing were consistent with a Caa3 rating level, with broadly balanced risks.
\nDefault risks to reduce
\n\u201cSignificant external financing becoming available in the very near term, such as through the disbursement of the next tranches under the current IMF programme and related financing, will reduce default risk potentially to a level consistent with a higher rating.\u201d
\n\u201cHowever, in the current extremely fragile balance of payments situation, disbursements may not be secured in time to avoid a default,\u201d Moody\u2019s statement added.
\n\u201cMoreover, beyond the life of the current IMF programme that ends in June 2023, there is very limited visibility on Pakistan\u2019s sources of financing for its sizeable external payments needs,\u201d it added.
\nMoody\u2019s said that the downgrade to Caa3 from Caa1 rating also applies to the backed foreign currency senior unsecured ratings for the Pakistan Global Sukuk Programme Co Ltd. The associated payment obligations are, in Moody\u2019s view, direct obligations of the Government of Pakistan.
\nRationale for downgrade
\nIn its rationale for the downgrade to Caa3, Moody\u2019s said that the government liquidity and external vulnerability risks have risen further since Moody\u2019s last review in October 2022.<\/p>\n
\u201cPakistan\u2019s foreign exchange reserves have declined to a critically low level, sufficient to cover less than one month of imports. Amid delays in securing official sector funding, risks that Pakistan may not be able to source enough financing to meet its needs for the rest of fiscal 2023 (ending June 2023) have increased.\u201d<\/p>\n
\u201cBeyond this fiscal year, liquidity and external vulnerability risks will continue to be elevated. At the same time, prospects of the country materially increasing its foreign exchange reserves are low,\u201d it said.<\/p>\n
External financial needs
\nOverall, Moody\u2019s estimates that Pakistan\u2019s external financing needs for the rest of the fiscal year ending June 2023 to be around $11 billion, including the outstanding $7 billion external debt payments due. The remainder includes the current account deficit, taking into account a sharp narrowing as imports have contracted markedly.<\/p>\n
Moody\u2019s said that in order to meet its financing needs, Pakistan would need to secure financing from the IMF and other multilateral and bilateral partners.<\/p>\n
Critical ninth IMF review
\n\u201cMoody\u2019s assumes successful completion of the ninth review of the existing IMF programme, although this is not secured yet. This would in turn catalyse financing from other multilateral and bilateral partners.\u201d<\/p>\n
\u201cAt the same time, the government will also need to obtain the rollover of the $3 billion China SAFE deposits and secure $3.3 billion worth of refinancing from Chinese commercial banks for the rest of this fiscal year. Of this $3.3 billion, Pakistan has already received a deposit of $700 million from the China Development Bank on 24 February 2023,\u201d it said.<\/p>\n
Extremely fragile
\nThe rating agency said that while this year\u2019s external payments needs may be met, the liquidity and external position next year would remain extremely fragile.<\/p>\n
\u201cPakistan\u2019s financing options beyond June 2023 are highly uncertain. It is not clear that another IMF programme is under discussion and if it does happen, how long the negotiations would take and what conditions would be attached to it.\u201d<\/p>\n
\u201cHowever, in the absence of an IMF programme, Pakistan is unlikely to unlock sufficient financing from multilateral and bilateral partners,\u201d it said.<\/p>\n
According to Moody\u2019s, headline inflation is likely to rise further as energy prices increase in tandem with the removal of energy subsidies.<\/p>\n
At the same time, reform measures to raise fiscal revenue are likely to remain key to unlocking further financing from the IMF, as they will help to alleviate debt sustainability risks, as per the agency.<\/p>\n
Continued IMF engagement must
\n\u201cContinued IMF engagement, including beyond the current programme, will likely help to support additional financing from other multilateral and bilateral partners, which can reduce default risk if this is achieved urgently and without further raising social pressures,\u201d said Moody\u2019s in its statement.<\/p>\n","protected":false},"excerpt":{"rendered":"
Concurrently, Moody\u2019s has also changed the outlook to stable from negative SINGAPORE Moody\u2019s Investors Service Tuesday slashed Pakistan\u2019s sovereign credit rating to \u2018Caa3\u2019 amid critical loan talks with the International Monetary Fund (IMF), arguing that the worsening liquidity situation was \u201csignificantly raising default risks.\u201d The cash-strapped nation has been in talks with the IMF to […]<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[2],"tags":[],"class_list":{"0":"post-316614","1":"post","2":"type-post","3":"status-publish","4":"format-standard","6":"category-top-news"},"yoast_head":"\n